There are some of big personal finance personalities that make credit cards seem like they are evil. They should never be used and if you ever had one you should cut it up or go freeze it in a block of ice in your freezer. They have their reasons and I completely understand why this is the path that some people need to take with credit cards. If you have problems with credit cards, spend money you don’t have and carry a balance every month I can agree with them that you shouldn’t have credit cards.
However, I do have a problem with the big personalities making a blanket statement that covers everyone. Credit cards can provide a lot of great benefits IF you use them correctly. In my opinion the only way to correctly use a credit card is to only spend what you have budgeted for and pay it off in full every single month. (There are some small exceptions but I am not going to get into those today.)
If you pledge to use credit cards correctly you have some great benefits awaiting you. The biggest benefit in my eyes are the financial (cash) benefits. There are many credit cards out there that will give you cash back for every single dollar you spend. I have two credit cards I currently use that do this. The first gives me 1% cash back up to $10,000 spent every year and 1.5% cash back on anything spent above that. The second gives me 1% cash back on every dollar spent and 5% cash back on each dollar spent in categories that change every quarter. I only use this card for the 5% categories and my other card for everything else. I easily get over $200 back a year just by using these credit cards for all of my purchases.
Another financial benefit from credit cards is sign up bonuses. I got paid $300 after my first purchase on one of my credit cards! You can gain a lot of money this way but you have to have good credit and realize that it may hurt your score in the short term if you apply for a lot of new credit cards. While I don’t advise you sign up for every card that will give you a sign up bonus I definitely think you should take advantage of them if you would otherwise use the credit card for its other features.
Credit cards can help you earn more interest too, and I don’t mean the interest you pay them for carrying a balance either. When you make purchase with your credit card you won’t have to pay it off immediately. Depending on when you made it in your statement cycle you could have anywhere from 20-50 days to pay for that purchase before you start paying finance charges. While bank account interest rates are low now, when they eventually move higher you could stand to make a few dollars by waiting to pay your credit card until just before the due date. Leave the money in your bank account and watch it accrue interest!
A credit card statement is a great tool for budgeting. If you put all of your transactions on a card you can sit down with your statement and divide your purchases up into your budget categories to see how well you are adhering to your budget. I often to forget my automatic payments in my budget analysis since I don’t get a physical receipt for them. By going through my credit card statement every month I always catch them and make sure they are recorded.
These are some of the simpler reasons on why I use a credit card over cash. In the near future I’ll be writing another post that delves into many well hidden credit card perks that most people either don’t know about or never use.
What is your opinion about using credit cards? Do you use them for financial gain or have you sworn them off because you know that credits cards don’t mix well with you?